Sears swings to a steep loss

NEW YORK (MarketWatch) -- Sears Holdings Corp., already struggling with declining sales and traffic in the face of rising competition, swung to a wider-than-expected third-quarter loss after the downturn in the U.S. economy hurt demand at both its Kmart and Sears chains.

The company abandoned its previously issued outlook after November sales continued to decline. However, shares, having lost two-thirds of their value this year, jumped 10% to $35 after the company said it's considering closing additional stores and buying back as much as $500 million of its stock.

"That's [being] taken well," said analyst Joe Feldman of Telsey Advisory Group in an interview. "They've been slow to close underperforming stores. People do want to see them close more stores. But with the core operations of the company in terms of sales and traffic, we've not seen improvement. They've lost the relevance to the consumers."

Its net loss was $146 million, or $1.16 a share, compared with a profit of $4 million, or 3 cents, a year earlier, the Hoffman Estates, Ill.-based company
SHLD, -6.11%
said Tuesday. Revenue in the quarter ended Nov. 1 declined 7.8% to $10.7 billion.

Excluding costs to close 14 stores and a gain from Sears Canada's hedge transactions, the company said the loss would have been 90 cents a share. On that basis, it missed the 54-cent average loss estimate of analysts surveyed by FactSet.

U.S. sales at Sears stores open at least a year declined 11%, and such sales dropped 7% at Kmart after demand worsened in October. Sales were down across most categories, led by products directly impacted by collapsing housing market, including home and household goods and lawn-and-garden items. Apparel sales also were hurt, the company said. November same-store sales declined 8.7%.

Sears Canada was one bright spot, posting higher operating results.

The economy aside, Sears has been hurt by competition from the likes of Wal-Mart Stores Inc.
WMT, -0.57%
and J.C. Penney Co.
JCP, -3.22%
after Chairman Edward Lampert, whose ESL Investments owns a majority stake in the company, skimped on store investments and cut other costs, analysts have said.

"Sears and Kmart will continue to lose share," said Credit Suisse analyst Gary Balter, who has an underweight rating on the stock. "It is also hard to imagine that Sears reverses its long history of market-share declines." See related First Take commentary.

The company has brought back a layaway program at Kmart and expanded that to Sears. It said results had been "encouraging," though it doesn't recognize results until after merchandise is paid in full upon pickup by customers.

Sears also abandoned a profit outlook given in August in light of the declining economy, which has hurt retailers virtually across the board. It had forecast at that time that same-store sales for the rest of the year would be flat or modestly lower, though it said it foresaw a higher profit before interest, tax, depreciation and amortization, or EBITDA, in the second half of the year.

It's also closing eight additional underperforming stores, which it first announced in November. The closings are expects to add to profit via the elimination of negative cash flows. The company said it might consider additional store closings or divestitures as well as acquisitions and repurchase of debt to give it financial flexibility in the near term. Balter said, however, that the company's closing costs are unusually high and may hinder its capacity for further closings.

Sears, which had $1.2 billion in cash at the end of the quarter, said it's reduced its rate of repurchases throughout 2008.

It also said an affiliate of Lehman Brothers
LEHMQ
has a $207 million total commitment in its $4 billion revolving credit line but hasn't funded its proportionate share of borrowings under that line since Sept. 17.

Separately, Sears announced new executives to lead various business units, including posting former Lehman Brothers Chief Administrative Officer Scott Freidheim to a newly created position as executive vice president of operating and support businesses.

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